Robot workers take over warehouses

(CNNMoney) -- Long after Webvan.com's legendary flameout in 2001, the online grocer's biggest problem never left Mick Mountz's mind.

As employee No. 400 at the dot-com, he knew that it simply cost too much to fulfill online orders. Labor was the killer cost: Employees had to go pick out products on shelves before they could be packed into boxes, and those minutes cost money. "That 89 cent can of soup was costing us $1 to get it into the tote," Mountz remembers.

While working at his next job at a consumer electronics company, the "eureka moment" suddenly hit: What if products could walk and talk on their own? You could design a completely different kind of warehouse. And you could staff it with robots.

Mountz left that job in 2002 to start Kiva Systems, the Boston company that would bring that vision to life. Today, nearly a decade later, thousands of Kiva's bots run around filling orders for the Internet's a-list retailers, including Staples, The Gap, Amazon (AMZN, Fortune 500) and CrateandBarrel.com.

But Mountz's Jetsons-style vision wasn't an easy sell. For the first two years, Silicon Valley investors told him that robots running warehouse floors couldn't be done. A hardware company building robots needed at least $100 million invested just to break even, they said. "I heard 'No' 50 to 100 times in 2002," Mountz says.

Mountz didn't buy it -- so he began networking. His former Harvard Business School classmates introduced him to executives they knew at The Gap, Dell, Motorola and JCrew. Living off his savings, Mountz visited those operations, slept on friend's couches and spent hours following executives around warehouses, asking questions until they politely asked him to leave.

He convinced old fraternity buddies from Massachusetts Institute of Technology to help him build a prototype robot. A group of angel investors put $1.6 million behind Kiva Systems, and in 2004, another friend introduced Mountz to Ajay Agarwal, who is a managing director at Bain Capital Ventures in Boston.

Agarwal remembers that first meeting with Mountz inside Kiva Systems' tiny office in Burlington, Mass., where he watched a demonstration of five robots maneuvering a stack of shelves around a room. Where other investors saw a bunch of expensive robots, Agarwal saw a disruptive technology that could transform the $100 billion e-commerce market.

"This idea was so simple yet so brilliant," says Agarwal. "The market was ripe. E-commerce is not going to go away."

Bain Capital Ventures wound up investing $5 million immediately in Kiva and then an additional $15 million more over the next three years. But before striking a deal, Agarwal introduced Mountz to people he knew at Staples and Walgreens. Then he watched the inventor present his plan.

Kiva Systems wasn't the only option for those online retailers. Competitors tout conveyor belt systems, cart systems and even voice-directed technology to help packers pick products. Mountz promised potential customers that his robots would allow them to do two to three times as many orders per hour than traditional warehouse operations.

"Mick was impressive," says Don Ralph, a senior vice president at Staples (SPLS, Fortune 500) who listened to one of those early presentations. "Kiva is not the end-all-be-all, but I thought they had an innovative idea."

Still, convincing online retailers to bet their most vital business operations on a bunch of robots was not a slam dunk. "Fulfillment is the core of these operations, so when we were pitching them, they were hearing 'heart lung transplant,'" Mountz says.

A "startup kit" of robots would cost $1 million to $2 million, and a large warehouse operation with 1,000 robots costs $15 million to $20 million. Setting up the software and grid systems inside the warehouse requires six months of planning, simulated modeling and testing. Then logistics managers must be trained before handing them the keys to the operation.

The first few customers -- including Staples-- moved cautiously, setting aside a space the size of a basketball court for Kiva robots. Eventually, they moved to full-scale operations with hundreds of robots. "Like any technology, there were bugs, but we never had a crisis," says Ralph of Staples, which has 1,000 robots working at two of its warehouses.

Today, Kiva Systems is profitable. Backed by $33 million from investors, the Boston company has 240 employees, a list of prominent customers and revenue of more than $100 million, according to Mountz. He says sales grew 130% last year, and that Kiva is hiring 20 to 30 people each quarter to keep up with demand.

Of course, the infiltration of robots translates to fewer new warehouse jobs. But it's not all bad news for workers, Mountz says: Kiva's system lets retailers double or even triple productivity, freeing up resources for other investments.

The robots also make for a more pleasant work environment, says John Ling, logistics vice president at Crate and Barrel. The 50 people who now pack 2,000 boxes a day alongside 50 robots at Crate and Barrel's Tracy, Calif., warehouse spend their days in a better lit, cleaner operation with no noisy conveyor belts, he says. The robots eliminate much of the mundane physical labor employees once did to retrieve products off shelves.

Customers are also benefiting: Packages can now be shipped the next day from that operation, an upgrade from a system that previously took two to three days to get an order out the door.

The robots are a natural progression, Ling says. "Most of this stuff is driven by computers anyway."